Progression in the income tax system
On average, payment of taxes varies from 11% for those with the lowest incomes to almost 47% for those with incomes of over DKK 1 million. Read more about the division of incomes and taxes for all 4.8 million taxpaying Danes.
The Danish income tax system is progressive. That means that the percentage paid in tax increases as income increases. Conversely in a proportional tax system, tax makes up a fixed percentage of the income regardless of the size of the income.
This progression is built into the tax system by making the total tax consist of different taxes that are collected on different tax bases. Some of the taxes have a lower limit allowance so that tax is not due on incomes under a certain level.
As the lower limit allowances are different in size or are not given, some of the taxes are collected on the entire income while other taxes are only due when the income reaches a certain level.
This is illustrated in the figure below. While labour market contribution is due on the entire income, a personal allowance is given in the tax basis for the municipal taxes and bottom-bracket tax, before tax is due. Top-bracket tax, as its name implies, is only paid on the highest income levels, i.e. the part of the income that is above DKK 389,900.
Note. Based on a tax rate of 25.7%, the rate in an average municipality in 2011 including church tax. Tax rates vary from 23.24% in the cheapest municipality up to 28.96% in the most expensive.
In table 1, all taxpayers are placed in income brackets according to the size of their personal income before the allowance for labour market contributions.
In 2011 the total income tax and property value tax is estimated to DKK 338 billion. In addition, labour market contributions amount to approximately DKK 73 billion (excluding labour market contributions made on employer-administered pension payments). The table shows how much the total income tax, property value tax and labour market contributions amount to in the various income brackets and the far right column shows the percentage of income made up by the sum of these taxes.
For the lowest level income groups, the personal allowance means that the total tax only accounts for a small part of the income. Therefore, personal allowance has a decisive role in the overall progression of income tax. For those with a typical medium level of income the tax proportion is around 28-32%. For those with a slightly higher income this rises to between 32-36% while those with the highest incomes pay on average between 45-47% of their income in total income tax.
| Table 1. Taxpayers shown according to income in 2011 | ||||||
|---|---|---|---|---|---|---|
| Personal income before labour market contribution allowance | Number of taxpayers | Total income1) | Income and property value tax | Labour market contribution2) | Income tax, property value tax and labour market contribution as a % of income. 1) | |
| DKK | (1,000) | Pct. | DKK bill. | DKK bill. | DKK bill. | Pct. |
| Negative | 20 | 0 | -4.2 | 0.3 | 0.0 | - |
| 0 - 25,000 | 390 | 8 | 2.3 | 0.2 | 0.2 | 17.4 |
| 25,001- 50,000 | 130 | 3 | 4.6 | 0.2 | 0.3 | 10.9 |
| 50,001- 75,000 | 120 | 3 | 7.4 | 0.9 | 0.3 | 16.2 |
| 75,001- 100,000 | 180 | 4 | 16.0 | 3.0 | 0.4 | 21.2 |
| 100,001- 125,000 | 310 | 6 | 34.4 | 7.8 | 0.6 | 24.4 |
| 125,001- 150,000 | 415 | 9 | 56.6 | 14.5 | 0.8 | 27.0 |
| 150,001- 200,000 | 620 | 13 | 105.9 | 27.9 | 2.4 | 28.6 |
| 200,001- 250,000 | 415 | 9 | 92.4 | 24.1 | 4.4 | 30.8 |
| 250,001- 300,000 | 495 | 10 | 134.6 | 35.0 | 8.4 | 32.2 |
| 300,001- 350,000 | 490 | 10 | 158.4 | 41.9 | 11.2 | 33.5 |
| 350,001- 400,000 | 395 | 8 | 146.1 | 39.6 | 11.0 | 34.6 |
| 400,001- 500,000 | 430 | 9 | 188.0 | 54.4 | 14.2 | 36.5 |
| 500,001- 750,000 | 270 | 6 | 157.8 | 52.5 | 12.0 | 40.9 |
| 750,001-1,000,000 | 55 | 1 | 44.3 | 16.6 | 3.3 | 44.9 |
| Over 1,000,000 | 35 | 1 | 49.8 | 19.6 | 3.7 | 46.8 |
| All taxpayers | 4,770 | 100 | 1,194.6 | 338.5 | 73.3 | 34.5 |
Note: The law model calculations have been made based on a random sample of 3.3% of the population. Data from 2008 has been calculated for 2011 based on August 2011 predictions.
1) Personal income before allowance for labour market contribution.
2) Excluding payments into employer-administered pension schemes
The degree of progression in the tax system depends on how the income is defined against which the total tax is measured. The wider the income base, the lower the average percentages. Here the average tax payment has been measured in relation to personal income before the allowance for labour market contribution. On this basis, average tax payments for all taxpayers constitute 34.5%.
In the figure below, the average tax percentages from table 1 have been entered into a graph. The light blue curve shows that the average tax increases in line with income. The horizontal (blue) curve in the figure shows the level for the average tax percentage for all groups combined (34.5 pct.) while the broken (black) curve shows how many taxpayers are found in the various income brackets.
In a proportional tax system with a tax rate levied on a taxation base consisting of personal income before the allowance for labour market contribution and with no basic allowance, a tax calculated at 34.5% would bring in the same amount as is collected under the current system.
The figure also shows that in this type of system, all taxpayers with an income of below approx. DKK 375,000 would on average be worse off (the light blue curve is beneath the horizontal blue curve), and taxpayers with incomes over this amount would be better off (the light blue curve is above the blue). The majority of the population, see the black curve for the number of taxpayers who are on the left of the curves’ point of intersection, would therefore – other things being equal – experience tax increases in comparison with the current system, while a minority of those with large incomes would benefit from very large tax breaks, see the distance from the horizontal curve up to the light blue curve.
